Indicators’ 4th Monthly Gain Stirs Optimism

In the latest sign that the U.S. economy is rolling toward recovery, the government’s chief economic forecasting gauge increased for the fourth straight month in May, the Commerce Department reported Friday.

The 0.8% jump in the index of leading economic indicators reflected varied signs of life in an economy that tumbled into recession last summer. In addition, a separate government scale of current economic activity rose in May for the first time since June, 1990.

“I gather that the economy bottomed out in April, and the turnaround began in May,” said Michael L. Penzer, senior economist with the Bank of America in San Francisco.

The government index, a grab bag of 11 separate economic barometers, is supposed to foreshadow conditions several months in the future. Although its forecasting record is mixed, analysts said the May rise--reflecting the longest string of monthly gains in more than two years--bolsters the case that the economy has started to grow.

“This isn’t just a flash in the pan,” said Cynthia Latta, an economist with DRI/McGraw Hill in Lexington, Mass. “It’s going to stay with us for a few months at least.”

Most components of the government index climbed last month. Positive trends included an increase in building permits and a decrease in weekly unemployment claims. The index was also propelled by rising factory orders for consumer goods and orders for new plants and equipment, higher prices for raw materials and a longer workweek.

At the same time, consumer expectations declined and stock prices fell.

The generally positive pattern was consistent with other recent developments in the economy, such as increases in consumer spending and personal incomes last month. In light of such findings, Michael J. Boskin, the chief White House economist, said this week that the Administration believes the 1990-91 slump is over.

Increasingly, questions center on the strength and longevity of the expected recovery. By at least one analysis, the government index Friday signaled that the turnaround will be only lukewarm, in contrast with the usual pattern of energetic recoveries since World War II.

The clue comes from comparing recent rises in the index with increases at the end of the last several slumps. On average, the index jumped 6.4% in the four months after it reached its low point. But this time it rose just 3.1% in that period, said Joel L. Naroff, chief economist at First Fidelity Bancorp in Philadelphia.

“That seems to indicate that the recovery will be milder than in the past,” Naroff concluded.

Yet, a moderate recovery has its advantages, some analysts say. A gradual upturn might allow for growth without inflation, reducing the risk that the economy would overheat--requiring a punishing round of high interest rates to cool things off.

“Really, a slow turnaround and a modest recovery will be better for the long-term health of the economy than a boom,” Latta said.

Others fear that the coming turnaround will not be sustained, however, even at tepid levels, and that the nation may slip back into a slump within months. This phenomenon is known as the double-dip recession. Such a pattern emerged in four of the last eight downturns, said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Despite Friday’s economic reports, he worries that household debt levels, overly cautious lenders, rising tax burdens and other problems could erode spending--especially for homes and autos--thereby toppling the economy back into recession.

“I don’t think we should be dancing with joy right now,” Sohn cautioned.

In a revision, officials Friday said the government’s leading index rose 0.4% in April. They initially had said it rose 0.6%. Separately, officials said the government’s index of coincident indicators--intended as a snapshot of current economic strength--rose 0.2% in May after being unchanged in April. This gauge, which includes nonfarm employment, personal income and industrial output, hasn’t risen in almost a year.

The Economy

Index of Leading Indicators Jumps

* Indicator: The May index of leading economic indicators, the government’s chief economic barometer.

* What it did: The index jumped a strong 0.8%, marking its first four-month string of gains in 2 1/2 years, the Commerce Department reported.

* What it means: For many analysts, the gain was further confirmation that the economy had turned. But most expect the recovery to moderate, and some said there was a chance for a “double-dip” recession in which the economy could tumble after three months of growth in the gross national product.

* Highlights: The biggest sources of strength among the leading indicators were a drop in weekly unemployment claims and a jump in building permits, a barometer of future activity.

Index of Leading Indicators

Seasonally adjusted index, 1982 = 100

May, ‘91: 143.1

Source: U.S. Dept of Commerce